ETF Digest

) -- A peculiar situation has recently arisen with regards to the

VIX Index

. Popularly referred to as the "fear index" or "fear gauge," the VIX is the Chicago Board Options Exchange Market Volatility Index. It roughly corresponds to the expected movement (or volatility) of the S&P 500 over the next 30 days.

When the VIX rises it usually indicates rising fear or uncertainty in the markets, and this week the VIX is looking pretty calm (low). If you look at the trading volume though, it tells a very different story. The VIX registered the second-highest daily trading volume on record last month with 1.34 million contracts, up about 65% compared with January. The only time the index has seen more volume was in August, when the market was shaken by Europe's sovereign debt crisis, as well as a downgrade of the U.S.'s credit rating.

Of course, in August, that volume spike corresponded to a rise in the VIX and a drop in stock prices. This time it's different. Stock prices continue to make strong gains and volume on the VIX is high, as the VIX declines in real terms.

Investors looking to gain quick long positions in the S&P 500 are selling leveraged VIX-related instruments. On the other hand, investors looking for insurance on their long positions have been buying TVIX or UVXY.

Last week, volume was so high on TVIX (VelocityShares Daily 2x VIX Short-Term ETN) that its issuer, Credit Suisse, was forced to halt issuance because of internal limits on the size of the ETN. On Friday TVIX was trading at an 11% premium to its indicated value.

The VIX index (green), UVXY (blue) and TVIX (red). Notice how TVIX and UVXY diverge as share creation is halted on TVIX and it begins to trade at a premium.

Instead, investors have piled into a different product that provides VIX exposure, UVXY (ProShares Ultra VIX Short-Term Futures ETF). UVXY saw relatively huge daily volume on Thursday and Friday, with more than 5 million shares changing hands. The leveraged fund was launched in 2011 and follows VIX futures.

It could be that as firms increase their exposure to riskier equities, they are using more and more VIX-related risk products such as ETNs to hedge their long exposure. Only time will tell if this current bullish sentiment holds water, but at least in the near-term, it appears to be the case.

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